Venezuela: international oil companies can rescue industry if Chavez makes terms more favorable

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21 December 2010, Oil

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Venezuela's socialist economy is buckling under the pressure of costly social programs and the region's highest annual inflation rate. In recent years President Hugo Chavez has extended the state's involvement into many areas of the economy, but it is becoming increasingly obvious that the nationalized economy is not seeing the levels of investment to maintain economic growth.

The program of nationalization was intended to exert more state control over key public sectors, thus tightening the political grip of Chavez. With oil prices averaging $90 per barrel in 2008, more than $60 a barrel in 2009, and nearly $80 a barrel in 2010, the government should have been able to fund social programs and maintain investment in key industry sectors. But oil prices fluctuated wildly in 2008 and 2009, leading to sudden spending cuts and freezes that were very badly managed.

Meanwhile, an economy that imports vast amounts of consumer goods has had trouble maintaining agricultural production and, currently staggering under the burden of subsidizing gasoline prices at only $0.02 per liter, is running into trouble. An annual inflation rate of 30% is a key symptom of the nation's problems, and normally sympathetic countries such as Brazil and Argentina are expressing concerns over Venezuela's direction.

Chavez claimed that state oil company Petroleos de Venezuela S.A. (PDVSA) could fill the gap following the withdrawal of foreign investors, but a combination of corruption, antiquated equipment, inexperienced personnel, and mounting debts to suppliers have contributed to oil production falling about 1 million barrels per day (bpd) below the officially published figure of 3.3 million bpd. Therefore, it is unsurprising that the WikiLeaks revelations tell us that the Chavez administration has been seeking deals with foreign oil companies.

If foreign investors are to return to the country, then the terms offered by Chavez must improve. The leaked cables reveal that Italian oil firm Eni was able to squeeze improved conditions out of PDVSA over a deal in the Orinoco belt at the start of 2010, but an inherently anti-western Venezuela remains reluctant to hand the initiative to North American and European companies. Chavez would rather welcome investment from Russia and China, which are viewed as more "loyal" supporters of Chavez's political regime.

In April 2010 Venezuela and Russia announced a joint venture to produce 50,000bpd in the Orinoco basin, of which PDVSA will own 60%. Furthermore, the two nations' oil ministries signed an agreement for TNK-BP to buy three of BP's assets in Venezuela by 2011.

China has been profiting from cheap Venezuelan oil for some time, and PDVSA is now China's third largest oil supplier. Relations improved further at the start of December when China's three main state-owned oil companies signed six agreements, increasing their investments to a planned $40bn dollars.

However, Venezuela must accept that Russian and Chinese corporations are as profit-driven as their western counterparts. Even if the measures Chavez imposes continue to reduce the economic viability of operating in the Venezuelan oil market for companies such as Exxon, Shell, and Chevron, he will have to start improving the conditions for those firms he does want operating in his country.

Source: Datamonitor

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